Final answer:
The FHA primarily acts as an insurer in the mortgage lending process, providing federal insurance for home loans, which encourages banks to lend and promotes broader homeownership, especially during financial downturns.
Step-by-step explanation:
The role played by the Federal Housing Administration (FHA) in mortgage lending is primarily that of an insurer. Established in 1934, the FHA's main role has been to encourage banks to offer home mortgages by providing federal insurance against homeowner defaults. This was part of a broader effort to stimulate the housing market during the Great Depression and to extend federal oversight over the home loan industry. The FHA helps maintain the stability of the housing market and promotes homeownership by ensuring the loans made by lenders for home buying.
By insuring home loans, the FHA helps borrowers who might not otherwise be eligible for traditional financing to become homeowners. They also play a part in setting standards for construction and underwriting but do not directly lend money to applicants; hence they are not bankers. They do not appraise individual properties themselves, so they are not appraisers. While they create and implement rules for the loans they insure, their primary function is insurance, not rule-making.